414 R.M. Solow one by Lindbeck Snower is that they both focus on this important and neglected aspect of the labor market; see also McDonald solow( 1985) The difference between the present paper and Lindbeck Snower's is that the latter focusses mainly in hiring and firing costs and the incumbent workers ability to exploit the market power that these costs confer, where- as here we concentrate on skill differences(which are also mentioned by Lindbeck Snower) and longer-run considerations concerning the ultimate of the labor pool. In addition, Lindbeck Snower focus on the firms decision whether to replace some or all of its incumbent workers with outsiders, whereas we take it for granted that the firm cannot or will not do that, and look only at the firms decision whether to make a marginal addition to the size of its labor pool Both papers succeed in showing how the wage policy of the incumbent group of workers is affected by the presence of unemployed outsiders neither solves the problem of accounting for the passive behavior of the outsiders. Lindbeck Snower observe that outsiders who succeed in gaining employment by undercutting and replacing some incumbents might find themselves ostracized by the remaining insiders That rings true, but it is just a particular aspect of the""-constraint mentioned earlier. In the part of the field that they cover, the two papers are complementar I. Outline of a Model We now start the formal specification of the model, explaining the notation The story extends over two periods, but we are mainly concerned what happens in the first. That is because the second period being last"period, has special characteristics that are of no real significance The firm starts with a pool of experienced workers, m in number. If it employs ell of them in period 1 it will generate an output whose market value is si f(eu. Here s, is a parameter describing the state of the firms product market in the first period. The state is entered multiplicatively for onvenience and simplicity. Similarly in period 2, if the firm employs e12 skilled workers they will generate a revenue S2 f(e12). For now we treat sr and sz as known; but eventually we will want to think of s2 as a random variable of known distribution labor pool. Some of these may be new entrants or re-entrants to the av, p There is also available a large supply of workers who belong to no firm force; but others may be workers who have held jobs with other firms bu have been laid off with no prospect of recall, for the usual reasons. These If this model is to be developed further, it would have to encompass a fairly large number of periods, of which all but the last few wouldone by Lindbeck & Snower is that they both focus on this important and neglected aspect of the labor market; see also McDonald & Solow (1985). The difference between the present paper and Lindbeck & Snower's is that the latter focusses mainly in hiring and firing costs and the incumbent workers' ability to exploit the market power that these costs confer, where￾as here we concentrate on skill differences (which are also mentioned by Lindbeck & Snower) and longer-run considerations concerning the ultimate size of the labor pool. In addition, Lindbeck & Snower focus on the firm's decision whether to replace some or all of its incumbent workers with outsiders, whereas we take it for granted that the firm cannot or will not do that, and look only at the firm's decision whether to make a marginal addition to the size of its labor pool. Both papers succeed in showing how the wage policy of the incumbent group of workers is affected by the presence of unemployed outsiders; neither solves the problem of accounting for the passive behavior of the outsiders. Lindbeck & Snower observe that outsiders who succeed in gaining employment by undercutting and replacing some incumbents might find themselves ostracized by the remaining insiders. That rings true, but it is just a particular aspect of the "propriety1'-constraint mentioned earlier. In the part of the field that they cover, the two papers are complementary. 11. Outline of a Model We now start the formal specification of the model, explaining the notation as we go along. The story extends over two periods, but we are mainly concerned with what happens in the first. That is because the second period, being the "last" period, has special characteristics that are of no real significance.' The firm starts with a pool of experienced workers, m in number. If it employs ell of them in period 1 it will generate an output whose market value is sl f(ell). Here sl is a parameter describing the state of the firm's product market in the first period. The state is entered multiplicatively for convenience and simplicity. Similarly in period 2, if the firm employs e12 skilled workers they will generate a revenue s2 f(elz). For now we treat sl and s2 as known; but eventually we will want to think of s2 as a random variable of known distribution. There is also available a large supply of workers who belong to no firm's labor pool. Some of these may be new entrants or re-entrants to the labor force; but others may be workers who have held jobs with other firms but have been laid off with no prospect of recall, for the usual reasons. These ' If this model is to be developed further, it would have to encompass a fairly large number of periods, of which all but the last few would count. Scand. J, of Economics 1985